The past week’s stock market volatility should have reinforced the idea that this market's growth is being led, for the most part, by materials and oil. Moreover, China's thirst for oil, metals and commodities is dictating the pace of that growth.

 

Lately, investors have been hanging on every word uttered by the U.S. Federal Reserve, trying to gleam hints of future stimulus actions. However, in my opinion, what the general stock market is saying by its actions of this past week is much of the world’s growth right now is revolving around China, and not necessarily based on what the Fed does.

In a surprise move last week, the Chinese decided to increase interest rates a quarter point. The government has indicated many times they are trying to control the “out of control” growth in certain areas of their economy. They have forced banks to increase reserves a few times in the last year and have finally have decided to raise the interest rates in the country, something they have not done since 2007.

 

Last week, China also reported their latest GDP numbers, which grew by 9.6 per cent this past quarter, down form the first two quarters of the year. Thus, the measures the government are taking to slow growth are working. The goal for the Chinese government is to keep their inflation levels from rising.

One would think that a 25-point increase in interest rates would not really factor in too much to a country's growth. However, on the day China raised rates, the markets tumbled. The North American markets were more than 100 points down as soon as they were opened for business. By the end of the day, the market had rallied back somewhat, but I believe the point had already been made. China has become one of the largest importers of certain materials, oil and commodities and if their thirst should dry up due to government intervention or overcapacity, the world would be in a difficult situation.

Canada is a country very much dependent on natural resources for its economy. In my opinion, this is why we have been able to do so well during difficult times. Thus, our Canada is also becoming more dependent on the Chinese for growth, and on the day they raised interest rates, our dollar took a large fall.

 

Canada’s exports, manufacturing and retail sectors, as well as its overall GDP, are all becoming more dependent on China. In turn, this affects our currency, which then affects everything else in the Canadian economy. Thus, I pose the question once again; who is truly responsible for moving the North American stock markets higher?

As investors, I believe we have to be very cautious in light to this scenario. In my opinion, China cannot keep up this pace of growth forever. Some analysts have already commented that they see slower growth from them ahead. For now, China is dominant enough to continue to take this market higher, however, I feel that investors should not be so foolish to think this environment will last forever.


I think you should constantly look for opportunities to take profit, especially in the oil, commodities and materials sectors. I also think you should continue to set your targets and place your stop losses as the market moves higher. Investors should ride the China effect higher as much as possible as it won’t last forever.

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you.



Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.